IT IS often said Real Estate Investment Trusts (REITs) offer an opportunity for many to realise their dream of owning large shopping malls, luxurious hotels or even sky-high commercial towers.
These real estate are often the domain of the rich. But REITs is an asset class that allows even the nascent investor exposure to such real estate for a fraction of the cost.
What REITs do is pool money from investors and this money is used to invest in a portfolio of income generating properties.
There are 17 REITs listed on Bursa Malaysia to choose from, and 39 on the Singapore Exchange. These REITs offer exposure to shopping malls, commercial buildings, hotels and even hospitals, including some properties overseas.
REITs have for a long time given investors decent returns, but like any investment, where there are rewards, there are risks too. When accumulating wealth, a diversified portfolio is often recommended.
“The average distribution yields of listed REITs over the past five years hovered within the range of 5.5%-6.6%, while capital appreciation is dependent on the timing of the investments, ’’ Malaysian REIT Managers Association (MRMA) chairman Datuk Jeffrey Ng Tiong Lip (pic) said.
This is somewhat higher than most rental properties, where the rental return is about 3%-5%. The returns from REITs are also certainly higher than the current fixed deposit rates of below 2%.
Most of the REITs use property rentals as a main source of dividend yields and so long as there are tenants, the dividend rates are stable.
Is the time right to invest in REITs?
For some time now, REITs have come under pressure because of lockdowns that forced several tenants at malls to close shop. Growth has been sluggish but analysts are beginning to suggest that it may be timely to relook at REITs.
AmInvestment Research in a note believes the worst may be over for REITs.
“We expect the sector to broadly be on its recovery path as consumer spending and footfall pick up, following the relaxed restrictions on the movement control order, as well as the upcoming Hari Raya festive season in the second quarter, ’’ it said.
UOB Kay Hian added that it does not see the share prices of REITs to be negatively affected in the short term, given that share prices have run up 4% on average since end-February.
“Moreover, yields are still attractive (5%-8%), further buoyed by an expected earnings recovery through 2022, ’’ UOB Kay Hian said.
Ng also believes this is an opportune time for Malaysian REITs to look into acquiring quality assets with long-term yield accretion and growth potential, as well as diversifying into emerging sunrise segments.
“There may also be potential for mergers and acquisition opportunities due to attractive valuation in the market, ’’ he added.
Buying REITs is similar to buying and selling shares or equities over the stock exchange. The movement in pricing of REITs depends on demand and supply and market conditions.
To trade in REITs, one needs to have a trading account with a broker and also a Central Depository System (CDS) account. Transaction and other fees and applicable when buying and selling REITs.
REITs enjoy a tax-free status on the condition that at least 90% of their total income is distributed to investors or unit holders annually. The way to measure REITs performance is unlike stocks’ earnings per share or the price to earnings ratio.
“The best performance measure (for REITs) is total returns – yields plus capital gains, ’’ said Rajen Devadason, a licenced financial planner with Manulife Investment Management (M) Bhd.
A report said funds from operations (FFO) or adjusted FFO is a good measure for REIT’s dividend paying capacity and growth prospects. It provides metrics like growth rates, dividend history and debt ratios.
What could potentially go wrong when investing in REITs?
Devadason said to juice up their returns some REITs operators borrow a lot of money in the current low interest rate environment to buy even more buildings to rent out.
“Regardless of prevailing interest rates, carrying too much debt on the books is risky. This is particularly true when interest rates start to rise. When that happens, REIT prices fall and the operating environment becomes more difficult, ’’ he added.
Ng added that REITs are highly regulated by the authorities. The average gearing level of REITs in 2020 was approximately 35%- 38%. This was well below the Securities Commission’s approved gearing limit of 50% pre-Covid-19 (this has been increased to 60% effective Aug 12,2020 to Dec 31,2022).